European Union still too much confused about Russia's Customs Union

29.01.2014

Russia is set to erase trade boundaries between EurAsEC countries and the European Union. Free trade zone negotiations are underway, although the implementation of the idea is associated with many difficulties, Russian President Putin admitted. Experts believe that it would be easier to make these plans real if the European Union had a different attitude to the Customs Union.

Vladimir Putin, at the summit EU-Russia, proposed to establish a free trade zone between the EU and the Eurasian Economic Union. The president admitted that the initiative was difficult to implement, although the creation of a free trade area would be highly appropriate. "It is important to start an appropriate expert dialogue," said Putin and invited the Europeans to study the question.

It should be noted that this initiative receives positive reactions. Such cooperation would be beneficial not only to members of the Eurasian Economic Community, but also to the European Union. There are hundreds of free trade zones in the world, ensuring significant increase in turnover to participating countries. For example, there are no trade barriers between the U.S., Canada and Mexico (North American Free Trade Area, or NAFTA); the Baltic countries trade with each other freely (Baltic FTA), Eastern countries (Bangladesh, India, Laos, Republic of Korea and Sri Lanka), Australia and New Zealand and so on. And, of course, there is the European Free Trade Association, with which the Russian leadership was expecting a merger. At the same time, Russia, Belarus, Ukraine, Armenia, Kazakhstan, Kyrgyzstan, Moldova already have a free trade agreement (FTA CIS) that was signed on 18 October 2011.

"There are hundreds of free trade zones in the world. They are advantageous because trade barriers are eliminated, import duties are zeroed, and this is beneficial to both parties at some stage, under certain conditions. Naturally, negotiations have to be conducted before such a zone is created," Alexei Portansky, a professor at the Faculty of World Economy and International Politics at the Higher School of Economics, told Pravda.Ru. He is confident that there is a long way to go to implement the above-mentioned initiatives when it comes to Europe and the Eurasian Economic Community.

However, Russia is not going to stop at the EU. In the short term, Russia may get rid of trade barriers with New Zealand and create similar barter conditions with Vietnam. They are the countries, with which free trade area negotiations are in full swing. Russia reportedly received similar requests from 35 countries, including from Central and South Americas and Arab states. There is nothing outlandish in the desire to expand trade with other countries, thereby to enhance economic development, and the Russian market, enormous in its potential, is very attractive for importers from all over the globe. Will Russia receive nothing but benefits from the reduction of trade barriers?

"The problem is that a free trade area is a double-edged sword, - the head of the Laboratory for the Study of Market Economy of the Faculty of Economics, Andrei Kalganov said. - On the one hand, it activates the flow of goods, and on the other hand, it intensifies competition. In this sense, one should treat such measures with caution, because the competitiveness of the Russian economy is not high enough. In case a free trade area is created, Russia may suffer damage both from competition with cheaper products from less developed countries and from competition with better quality goods from developed countries."

Indeed, in order to get a quality exchange of goods, one must have a good export potential. Russia already has a bitter experience of joining the WTO at the time of decline in domestic production. If we assume for a moment that trade barriers are removed, and European goods will pour into Russia at more affordable prices, then the idea of the FTA does not look so positive at all. The situation is the same with other members of the Customs Union, particularly Kazakhstan and Belarus. Will the domestic production of Russia's allies in the Customs Union endure competition with European goods?

"This is a complex question. Like I said, this measure is a double-edged sword. It can bring benefits, but can also bring increased competitive pressure from more powerful countries in economic terms," says Kalganov.

However, the leadership of Belarus and Kazakhstan in particular do not worry much about the influx of foreign goods - it is evidenced by their desire to join the WTO as soon as possible. Thus, Belarus hopes to join the worldwide organization in 2015.

Kazakhstan is eager to become a WTO member too. Kazakh President Nursultan Nazarbayev asked the EU leadership to accelerate the process of negotiations on Kazakhstan's accession to the organization. Vice Minister for Economy and Budget Planning, Timur Zhaksylykov, announced that it could happen as early as 2014. Thus, Customs Union members do not worry much about the problem of increased competition.

WTO accession, however, is a separate issue of a each certain country, whereas all members of the Customs Union seek the creation of a free trade zone with the EU. This is where, according to Alexei Portansky, the main problem arises.

"The EU does not recognize our Customs Union yet, so they do not understand whom they can build a free trade zone with. If it were with Russia, it would be more or less clear. As for the Customs Union, there are many problems inside the union, which is essential for Europe ... So they are not ready in legal terms to build relationships with our Customs Union," Professor Portansky said.

Nevertheless, Putin clearly stated that the rapprochement with Europe would be taking place exclusively within the EurAsEC and stressed out that European and Eurasian integration processes did not contradict to each other.